23.1 – Case studies

We are now at the very end of this module and I hope the module has given you a fair idea on understanding options. I’ve mentioned this earlier in the module, at this point I feel compelled to reiterate the same – options, unlike futures is not a straight forward instrument to understand. Options are multi dimensional instruments primarily because it has many market forces acting on it simultaneously, and this makes options a very difficult instrument to deal with. From my experience I’ve realized the only way to understand options is by regularly trading them, based on options theory logic.

To help you get started I would like to discuss few simple option trades executed successfully. Now here is the best part, these trades are executed by Zerodha Varsity readers over the last 2 months. I believe these are trades inspired by reading through the contents of Zerodha Varsity, or at least this is what I was told. 🙂

Either ways I’m happy because each of these trades has a logic backed by a mutli disciplinary approach. So in that sense it is very gratifying, and it certainly makes a perfect end to this module on Options Theory.

Do note the traders were kind enough to oblige to my request to discuss their trades here, however upon their request I will refrain from identifying them.

Here are the 4 trades that I will discuss –

CEAT India – Directional trade, inspired by Technical Analysis logic

Nifty – Delta neutral, leveraging the effect of Vega

Infosys – Delta neutral, leveraging the effect of Vega

Infosys – Directional trade, common sense fundamental approach

For each trade I will discuss what I like about it and what could have been better. Do note, all the snapshots presented here are taken by the traders themselves, I just specified the format in which I need these snapshots.

So, let’s get started.

23.2 – CEAT India

The trade was executed by a 27 year old ‘Options newbie’. Apparently this was his first options trade ever.

Here is his logic for the trade: CEAT Ltd was trading around Rs.1260/- per share. Clearly the stock has been in a good up trend. However he believed the rally would not continue as there was some sort of exhaustion in the rally.

My thinking is that he was encouraged to believe so by looking at the last few candles, clearly the last three day’s trading range was diminishing.

To put thoughts into action, he bought the 1220 (OTM) Put options by paying a premium of Rs.45.75/- per lot. The trade was executed on 28th September and expiry for the contract was on October 29th. Here is the snapshot of the same –

I asked the trader few questions to understand this better –

Why did you choose to trade options and not short futures?

Shorting futures would be risky, especially in this case as reversals could be sharp and MTM in case of sharp reversals would be painful

When there is so much time to expiry, why did I choose to trade a slightly OTM option and not really far OTM option?

This is because of liquidity. Stock options are not really liquid, hence sticking to strikes around ATM is a good idea

What about stoploss?

The plan is to square off the trade if CEAT makes a new high. In other words a new high on CEAT indicates that the uptrend is still intact, and therefore my contrarian short call was flawed

What about target?

Since the stock is in a good up trend, the idea is to book profits as soon as it’s deemed suitable. Reversals can be sharp, so no point holding on to short trades. In fact it would not be a bad idea to reverse the trade and buy a call option.

What about holding period?

The trade is a play on appreciation in premium value. So I will certainly not look at holding this to expiry. Given that there is ample time to expiry, a small dip in stock price will lead to a decent appreciation in premium.

Note – the QnA is reproduced in my own words, the idea here is to produce the gist and not the exact word to word conversation.

So after he bought CEAT PE, this is what happened the very next day –

Stock price declined to 1244, and the premium appreciated to 52/-. He was right when he said “since there is ample time to expiry, a small dip in the stock price will lead to a good increase in option premium”. He was happy with 7/- in profits (per lot) and hence he decided to close the trade.

Looking back I guess this was probably a good move.

Anyway, I guess this is not bad for a first time, overnight options trade.

My thoughts on this trade – Firstly I need to appreciate this trader’s clarity of thought, more so considering this was his first options trade. If I were to set up a trade on this, I would have done this slightly differently.

From the chart perspective the thought process was clear – exhaustion in the rally. Given this belief I would prefer selling call options instead of buying them. Why would I do this? – Well, exhaustion does not necessarily translate to correction in stock prices. More often than not, the stock would enter a side way movement making it attractive to option sellers

I would select strikes based on the normal distribution calculation as explained earlier in this module (needless to say, one had to keep liquidity in perspective as well)

I would have executed the trade (selling calls) in the 2nd half of the series to benefit from time decay

Personally I do not prefer naked directional trades as they do not give me a visibility on risk and reward. However the only time when I initiate a naked long call option (based on technical analysis) trade is when I observe a flag formation –

Stock should have rallied (prior trend) at least 5-10%

Should have started correcting (3% or so) on low volumes – indicates profit booking by week hands

I find this a good setup to buy call options.

23.3 – RBI News play (Nifty Options)

This is a trade in Nifty Index options based on RBI’s monetary policy announcement. The trade was executed by a Varsity reader from Delhi. I considered this trade structured and well designed.

Here is the background for this trade.

Reserve Bank of India (RBI) was expected to announce their monetary policy on 29th September. While it is hard for anyone to guess what kind of decision RBI would take, the general expectation in the market was that RBI would slash the repo rates by 25 basis points. For people not familiar with monetary policy and repo rates, I would suggest you read this –

RBI’s monetary policy is one of the most eagerly awaited events by the market participants as it tends to have a major impact on market’s direction.

Here are few empirical market observations this trader has noted in the backdrop market events –

The market does not really move in any particular direction, especially 2 – 3 days prior to the announcement. He find this applicable to stocks as well – ex : quarterly results

Before the event/announcement market’s volatility invariably shoots up

Because the volatility shoots up, the option premiums (for both CE and PE) also shoot up

While, I cannot vouch for his first observations, the 2nd and 3rd observation does make sense.

So in the backdrop of RBI’s policy announcement, ample time value, and increased volatility (see image below) he decided to write options on 28th of September.

Nifty was somewhere around 7780, hence the strike 7800 was the ATM option. The 7800 CE was trading at 203 and the 7800 PE was trading at 176, both of which he wrote and collected a combined premium of Rs.379/-.

Here is the option chain showing the option prices.

I had a discussion with him to understand his plan of action; I’m reproducing the same (in my own words) for your understanding –

Why are you shorting 7800 CE and 7800 PE?

Since there was ample time to expiry and increased volatility, I believe that the options are expensive, and premiums are higher than usual. I expect the volatility to decrease eventually and therefore the premiums to decrease as well. This would give me an opportunity to buyback both the options at a lower price

Why did you choose to short ATM option?

There is a high probability that I would place market orders at the time of exit, given this I want to ensure that the loss due to impact cost is minimized. ATM options have lesser impact cost, therefore it was a natural choice.

For how long do you plan to hold the trade?

Volatility usually drops as we approach the announcement time. From empirical observation I believe that the best time to square of these kinds of trade would be minutes before the announcement. RBI is expected to make the announcement around 11:00 AM on September29th; hence I plan to square off the trade by 10:50 AM.

What kind of profits do you expect for this trade?

I expect around 10 – 15 points profits per lot for this trade.

What is you stop loss for this trade?

Since the trade is a play on volatility, its best to place SL based on Volatility and not really on the option premiums. Besides this trade comes with a predefined ‘time based stoploss’ – remember no matter what happens, the idea is to get out minutes before RBI makes the announcement.

So with these thoughts, he initiated the trade. To be honest, I was more confident about the success of this trade compared to the previous trade on CEAT. To a large extent I attribute the success of CEAT trade to luck, but this one seemed like a more rational set up.

Anyway, as per plan the next day he did manage to close the trade minutes before RBI could make the policy announcement.

Here is the screenshot of the options chain –

As expected the volatility dropped and both the options lost some value. The 7800 CE was trading at 191 and the 7800 PE was trading at 178. The combined premium value was at 369, and he did manage to make a quick 10 point profit per lot on this trade. Not too bad for an overnight trade I suppose.

Just to give you a perspective – this is what happened immediately after the news hit the market.

My thoughts on this trade – In general I do subscribe to the theory of volatility movement and shorting options before major market events. However such trades are to be executed couple of days before the event and not 1 day before.

Let me take this opportunity to clear one misconception with respect to the news/announcement based option trades. Many traders I know usually set up the opposite trade i.e buy both Call and Put option before major events. This strategy is also called the “Long Straddle”. The thought process with a long straddle is straight forward – after the announcement the market is bound to move, based on the direction of the market movement either Call or Put options will make money. Given this the idea is simple – hold the option which is making money and square off the option that is making a loss. While this may seem like a perfectly logical and intuitive trade, what people usually miss out is the impact of volatility.

When the news hits the market, the market would certainly move. For example if the news is good, the Call options will definitely move. However more often than not the speed at which the Put option premium will lose value is faster than the speed at which the call option premium would gain value. Hence you will end up losing more money on the Put option and make less money on Call option. For this reasons I believe selling options before an event to be more meaningful.

23.4 – Infosys Q2 Results

This trade is very similar to the previous RBI trade but better executed. The trade was executed by another Delhiite.

Infosys was expected to announce their Q2 results on 12th October. The idea was simple – news drives volatility up, so short options with an expectation that you can buy it back when the volatility cools off. The trade was well planned and the position was initiated on 8th Oct – 4 days prior to the event.

Infosys was trading close to Rs.1142/- per share, so he decided to go ahead with the 1140 strike (ATM).

Here is the snapshot at the time of initiating the trade –

On 8th October around 10:35 AM the 1140 CE was trading at 48/- and the implied volatility was at 40.26%. The 1140 PE was trading at 47/- and the implied volatility was at 48%. The combined premium received was 95 per lot.

I repeated the same set of question (asked during the earlier RBI trade) and the answers received were very similar. For this reason I will skip posting the question and answer extract here.

Going back to Infosys’s Q2 results, the market’s expectation was that Infosys would announce fairly decent set of number. In fact the numbers were better than expected, here are the details –

In rupee terms, net profit rose 9.8% to Rs.3398 crore on revenue of Rs. 15,635 crore, which was up 17.2% from last year”. Source: Economic Times.

The announcement came in around 9:18 AM, 3 minutes after the market opened, and this trader did manage to close the trade around the same time.

Here is the snapshot –

The 1140 CE was trading at 55/- and the implied volatility had dropped to 28%. The 1140 PE was trading at 20/- and the implied volatility had dropped to 40%.

Do pay attention to this – the speed at which the call option shot up was lesser than the speed at which the Put option dropped its value. The combined premium was 75 per lot, and he made a 20 point profit per lot.

My thoughts on this trade – I do believe this trader comes with some experience; it is quite evident with the trade’s structure. If I were to execute this trade I would probably do something very similar.

23.5 – Infosys Q2 aftermath (fundamentals based)

This trade was executed by a fellow Bangalorean. I know him personally. He comes with impressive fundamental analysis skills. He has now started experimenting with options with the intention of identifying option trading opportunities backed by his fundamental analysis skills. It would certainly be interesting to track his story going forward.

Here is the background to the trade –

Infosys had just announced an extremely good set of numbers but the stock was down 5% or so on 12th Oct and about 1% on 13th Oct.

Upon further research, he realize that the stock was down because Infosys cut down their revenue guidance. Slashing down the revenue guidance is a very realistic assessment of business, and he believed that the market had already factored this. However the stock going down by 6% was not really the kind of reaction you would expect even after markets factoring in the news.

He believed that the market participants had clearly over reacted to guidance value, so much so that the market failed to see through the positive side of the results.

His belief – if you simultaneously present the markets good news and bad news, market always reacts to bad news first. This was exactly what was going on in Infosys.

He decided to go long on a call option with an expectation that the market will eventually wake up and react to the Q2 results.

He decided to buy Infosys’s 1100 CE at 18.9/- which was slightly OTM. He planned to hold the trade till the 1100 strike transforms to ITM. He was prepared to risk Rs.8.9/- on this trade, which meant that if the premium dropped to Rs.10, he would be getting out of the trade taking a loss.

After executing the trade, the stock did bounce back and he got an opportunity to close the trade on 21st Oct.

Here is the snapshot –

He more than doubled his money on this trade. Must have been a sweet trade for him

Do realize the entire logic for the trade was developed using simple understanding of financial statements, business fundamentals, and options theory.

My thoughts on this trade – Personally I would not be very uncomfortable initiating naked trades. Besides in this particular while the entry was backed by logic, the exit, and stoploss weren’t. Also, since there was ample time to expiry the trader could have risked with slightly more OTM options.

And with this my friends, we are at the end of this module on Options Theory!

I hope you found this material useful and I really hope this makes a positive impact on your options trading techniques.

365 comments

I am planing to short nifty CE -8300 . As per my calculation (1SD) for 15 days to expiary high is 8245/- & low is 7976/- (Daily Average is minus -0.02 & Daily SD is 1.02 %
I will be grateful if you check & confirm whether working is properly done or not.

I read all your modules on options and I must thank you for such a great explanation, you are so gooooood at teaching, cant appreciate enough!

And I have one question, sooner you answer better it is, i want to know about long strangles, put/call buying should be equal in lots ..u said…but I find it little counter intuitive, please help me with below scenario –

suppose, one has to do long nifty strangles which are OTM, and put price is 20 and call price 4, so still one should go buy equal no. of lots ? or divide amount in 2 and allocate for puts & calls equally? or use counter-proportionality…like 1/5th amt for put – 20 rs and remaining 4/5th amt. for 4rs call?
and time horizon – till expiry
and risk — its fine both of them expire worthless

Dear Sir,
Is it better to prefer short selling of both call and put options after neutralising Delta factor prior to announcement of major events etc. and square off the trade after volatality cool off in view of conservative trading. please advise. Thanks & Best Regards, R V N Sastry

Read initial chapters, it was simple and easy to understand.the complex subject
Thanks a lot for the wonderful module.
Please convert then to PDF document , so that we can download and learn them offline.

sir,v.good hopefully these education ideas will change my trading&life dramatically,i learnt lot from u &big thanks deep from heart &moreoverdaybyday iam becomming so confident that by learning so much iam seeing mkts lot more easier&want to do it in big way,and why dont we get pivot points (pi)in commodities charts,clarify.

Hi Mr. Karthik Sir…
I am new to Market and heard a lot that Market is just a gambling and common people should stay away from it. I also had lot of confusion and didn’t know solution…but let me tell you after reading lessons provided by you in such a simple way, I am not only able to understand market but also I have confidence to trade in the market. And now I can confidently say that market is not a gambling place…
I donot find words to convey my gratitude towards your efforts…..God bless you…keep it up…!!!!

Dear Karthik,
Efforts are excellent.Read books from US libraries and websites and my understanding got cleared after reading yours. Your efforts in book form and in YouTube can benefit lot of retail investors.Those who can bent upon collecting money.
Looking for your advise to get info on implied and historical volatility on scrips in chart form to use it in trading.
Great!

Vipul, I know some really profitable and consistent traders who rely completely on simple candlestick techniques. Anyway, I will discuss Heiken Ashi at some point, but the focus now is on the next module 🙂

I have a query.How do i know whether the volatility of a particular contract is normal or high…i mean above what number is volatility considered high and at what number,volatility is considered normal.

Hello Sir,
I think in the statement below the prices and profit made should be per share and not the per lot.
“Do pay attention to this – the speed at which the call option shot up was lesser than the speed at which the Put option dropped its value. The combined premium was 75 per lot, and he made a 20 point profit per lot.”

Sir can you please explain delta neutral strategy in next module…. I mean it is explained on lots of websites and forums but after entering the trade in delta neutral strategy we have to make adjustments to keep the delta neutral so what all things should one keep in mind while making delta neutral and how often….

Thanks for the quick reply…. Really hats..off to your work … You are amazing … With lots of work i have hardly seen anyone on any forum replying to qweries so quickly…. This shows why zerodha is the best… Great people make a great company…😊

Sir,which is best way of putting sloss in indec optiond id it time based (3,5,7)r index going 2r3 strikes awayr simply leaving without sloss &waiting as options r volatile what makes sense pls elaborate

One chapter for one strategy will be a great deal.
Sir, can you now it self tell something about following situation?

Suppose you buy 1 lot in future but it turn out to be not in favour and it price goes down. What are the salvaging choices available. Shorting CEs or Long on PEs or long on next month future? I know it is too early to ask but just one sentence answer if possible.

Hello karthik Thanks for your initiative it helps me like anything,
My doubt is regarding time frame in option day trading for nifty at the money and slightly out of the money options which is better 5 min, 10 min or else? I am using technical indicator and chart patterns to take call on buying put or call.
Thank you in advance.

Hello Karthik, Very nice article. It really helped a lot for people like me. However you are suggesting not to follow technical chart? (I am referring above your answer. If so what is the next step to become a successful option day trader?
Thank you, Regards,
Prabhakar

Thank you very much for answering my query, It is so nice of you. However are you suggesting not to depend on chart for option day trading? If not what are the bet technical chart we need use for option day trading. Thank you, Regards, Prabhakar

1.In the case study 23.4 Infosys Q2 Result, the 1140 PE IV dropped to only 40% from 48%. Was it because the market perceived the spot to go down?
2.And in the immediately previous case you have mentioned that the Put looses value at a faster rate than the Call in case of an upside. Although OTM Put will have a lower Delta and the ITM Call will have a higher delta. I think I am missing something. Please help.

1) Volatility dropped because the outcome of the event was out and there were no more surprises pertaining to the stock.
2) This should be taken in a more generic sense – one option gains faster in premium value than the one the other one losing premium value. Which one gains and loses depends on the outcome and therefore the direction.

In Chrome, Ctrl+P converts web page into PDF file.I converted all chapters in the same way.
I think better not to trade before results.The outcome can be like exit polls of TV channels.Go horribly wrong.
Recent Infy results was best example.

I would like to add another sentence in your appreciation for presenting the complex subject which a person with little knowledge of mathematics can understand and make use in real life. Carry on with the good work.

The module on ‘Option Strategy’ is showing a placard ‘Coming Soon’ for quite sometime now. When can we expect to get that?

Hi Karthik,
In Nifty options, does increase/decrease of volume (contracts) traded has any significance,if so how? In NSE site top 20 contracts traded, I was trying to understand, if a contract is in top, does it mean the premium is going to increase or decrease?

The explanation provided by the author is simply amazing! There is so much value in the explanation provided in these chapters. One can easily charge 10-15k for it. I sincerely appreciate your hard work, effort, and urge to explain the subject from layman’s perspective. Great work!

Before the major events(like RBI Policy, election results), will it be prudent to directly short india vix index before the event when india vix shoots up, or it will be more safer to short atm calls and puts of nifty and book profits after the event when volatility cools down?

Eventhough, I am trading options for 2 years, it was Re-learning(refreshing) experience for Me. I really appreciate the Effort you put in to Zerodha Varsity. It’s awesome n every chapter is explained as simple as possible with examples. Truly, Zerodha is a Class Apart.

Karthik,
As you had said in your earlier chapters, P&L behaviour for put option comes out to be- P&L = [Max (0, Strike Price – Spot Price)] – Premium Paid
For that Ceat example, it comes out to be- -45.75,then how’s he making 7 ? Is P&L change in premium or the formula I just mentioned above?
Please don’t laugh at me, I’m a novice in options world.

The P&L formula you stated is true only if the option is held till expiry. Otherwise you just take the difference between the premiums (buying value minus selling selling value). If you do that for CEAT you will get the answer as 7.

sir,
“The 1140 CE was trading at 55/- and the implied volatility had dropped to 28%. The 1140 PE was trading at 20/- and the implied volatility had dropped to 40%.” when volatility drop premium also drop but here when volatility drop 28% and premium increase how its happen? please explain sir,

With the drop in Volatility the premium drops — this is the effect of vega on the premium. At the same time if the underlying also moves then there is the effect of delta. So this can clearly increase the premium.

Dear Karthik Sir,
Plz explain what is Put Call Ratio? How can We use it to predict market trend and how to calculate it? Is it really useful ? If yes then you can make a separate chapter on them. thanks..

hi, have question, lets say if I write, call option of nifty of 8000 @12.30, on monday that is 21-12-2015, and let say it goes down @1.05 on tuesday, can i clear by position. by buying same option? please help

sir,
expiry day of dec usd inr contract(29 dec) future settlement price is 66.37 so 66.50 is call option is ATM.As per theory closing day of expiry all OTM contract will worthless but here (29 dec) I check some strikes ATM,OTM,ITM all settled rs .0000 please find the screenshot and please explain why it happen

All Call option about 66.37 is considered OTM, including 66.5. Hence the 66.5 CE expiring worthless is justified. However the 66 and 65.5 option has an intrinsic value, not sure why NSE is is suggesting the settlement is ‘0’. Also, just for your information…. the options derives its value from the RBI reference rate (Spot price) and not futures price….but since its the expiry date both futures and underlying would be the same.

Need to dig up a bit further to figure out why the settlement is 0 for ITM options.

As mentioned in the CEAT eg u would have preferred to sell the call option and also not on single side..Is it selling slightly otm/Atm and buying the same month ext otm call(strike next to the shorted call) to take the advantage of consolidation or down trend movement? If so if the share moves continuously in the uptrend and it may end up in loss like ext otm becomes zero and slightly otm may end up as itm. Kindly clarify the thought behind your view..

With the entire view of options theory can I use the ta in underlying chart and taking position in ATM/Itm options is the fair thought? Because in the comments you have mentioned that options is not direct instrument like futures to play the intraday trading..with the use of Greeks and mix of ta the trades can be executed?

Then this will be a very high loss? . For example if Nifty at 8000 and I wrote 10,000 call which has no liquidity, how much loss would be there?
one suggestion, pls forward everyone reply to their email id, I asked a question somewhere but not able to find it now.

Hi Sir,
It would be very great if you could share more strategies executed by you or fellow traders. They will give practical insight and will be eye opener.
Also, can you please suggest some good books for reading on Options/ Strategies or related, which are more practical in sense.
Currently I am reading Traders, Guns and Money as found it mentioned. It’s a awesome book and has real life swap trade conundrums.

sir, in margin calculator bank nifty option for sell , which is weekly expiry basis is not updated,provide this asap, contacting 080-40402020 they are telling that margin is same as monthly expiry, which is not true!!!

Okay. Thanks Karthik.
I was looking for a list of 20-30stocks which have best liquidity in Options Market. Can you provide with any such list? I tried searching at various sites, but was not able to find one comprehensive list.

hi karthik,
can we depends on options fair value calucultor for taking a position,for eg-if today 8700 calls fair value was 124 in morning,it went up to 145 and once it was in 92 intraday and closed it at 114,if it trade below 20% than fair value can we take a 8700 call buy? or any other technical tools can we mix to arrive our trade for using fair value? or how logical can we put stop loss in fairvalue dependent trade? or its a wrong method?

Hi Karthik. I have a doubt regarding the weekly bank nifty options. I understand that the monthly options follow the particular month’s futures, and not the spot. What do the weekly options follow? Today, when market ended at 18571 (spot), the value of the 18500CE (Aug04 expiry) was 70 and the value of the 18700PE was 105. It just doesn’t add up.

Another related doubt: the market actually ended at 18627; and then after close, it adjusted to 18571. This adjustment happens everyday. What is the rationale behind this adjustment?

Yesterday was the expiry. This is about the weekly bank nifty options. The options I mentioned in my question are options that were slated to expire on August 4th. It didn’t add up to a premium of 200 yesterday. It only added up to 175.

Oh, I didn’t realize the settlement price could be different from the last traded price. I was doing paper trading on a strategy I’m working on, and the calculations based on the last traded price on the weekly expiry date left me confused. Thanks for clearing this up, Karthik!

Great effort put into making these resources. I thank both, the writer and Zerodha, for disseminating knowledge so clearly and efficiently. Looking forward to reading and understanding more in your other modules.

I have studied and tried to apply what I learnt from your module on options for the past two months. For the first month I hadn’t made any money (lost all what I made, though did secure my principal amount), but learnt a lot after ‘doing’ it practically on trading platform.
But then, I made around 20% profit in the 29SEPT2016 series, and I wouldn’t be able to do it without THIS module! Also learnt from the mistakes I did.

Thank you SO much for sharing such wonderful tool on Varsity – For all I have been successful in F&O the credit goes to YOU!
“Long live and prosper!”

Hi I have a question regarding option trading.
Assume I have 2 lac of capital, which I have totally invested in equity stocks. I have no more capital now.
Can I simultaneously write nifty call or put options using my equity stocks as security? Can the margin for options be used across my equity stocks?
Assume I have invested my money in large cap stocks .

Hi Karthik,
In the second case-study ie Nifty- Delta neutral strategy, why it is square off the position just before the RBI announcement? What would have happened that person had opted to square-off just after the announcement?

Because what I’m thinking is that volatility would be lower after the announcement compared with before the announce.

Thanks for the reply.
Yeah, I have understood. In the example above, by observing the given graph after the announcement, what would have happened if that person had opted to square-off just after the announcement?
1) make a loss
2) make lesser profit than Rs 10/-
3) make more profit than Rs 10/-
4) not much difference

Where can we see the implied volatility chart for stocks and bank nifty, to decide if the Volatility is high or low. For e.g. like we have India VIX to decide implied volatility levels for Nifty, where do we check the historical values for bank nifty and stocks ?

I am aware of this link. But it shows the value of IV in real time. What if I want to see historical values, to decide if the current value is high or low. Like to initiate a new trade on say Maruti, I need to look at historical values of IV to decide if the current value is high or low… where can I get the historical IV data….

Hi Karthik,
As you have mentioned several times that “IV of today is Historical volatility of tomorrow”. I have a query on checking whether volatility of today is high or low compared to historical data:

Today’s Implied Volatility of SunTV is 34.52 for 900 CE (Nov series, 2017).
I have calculated the daily volatility of SunTV for last 1 year, it is 2.73% and annualized volatility is 52.07%

Should I compare Annualized volatility of 52.07% with 34.52 (as of today, as per NSE). If yes, than can I presume IV is less than HV and one can look at buying option, keeping other factors in mind.

Hi Karthik,
Thanks for your feedback.
In continuation, than what is your suggestion is the best way to estimate whether today’s IV is cheaper/costlier than Historical values?
I am not able to decide on taking trades because of this costly/ cheap/fair value query in my mind. Pls suggest.
Also is NSE IV numbers based on past 1 year data.
Rgds

Valid question Dipankar. The most accurate way is to compare today’s IV, when its let’s say 5 days to expiry versus the IV of past when the expiry is 5 days. However, doing this is not really easy…and comparing historical versus today’s IV gives roughly the same kind of results. Hence I go with it.

Hi Karthik,
In the very last trade(Infosys directional trade), you have written that “the trader could have risked with slightly
more OTM options.” Can you elaborate on why would you go with more OTM. Change in premium would be more for slightly OTM option right? due to higher delta.(Assuming he is very confident of the directional trade).

Thanks Karthik for the wonderful insights!! I have a few queries on the trades.
1. In CEAT example, what would be the ideal strike price to choose in case I decide to write a call option instead of longing a OTM put. I went through your earlier chapters and quite clear on buying logic wrt to time to expire. From logic, I believe it would be ideal to short an ITM call for its high delta changes. Please validate.
2. In 2nd example, I am not very much clear on the explanation for shorting ATM strikes. Please clarify.
Hope u cud lighten up a few things over here again.

1) Never short a naked ITM option, can be very dangerous. The decision to write an option as opposed to buying its equivalent really depends upon how cheap or expensive the premium is with respect to the prevailing market conditions

“There is a high probability that I would place market orders at the time of exit, given this I want to ensure that the loss due to impact cost is minimized. ATM options have lesser impact cost, therefore it was a natural choice.” Not very much clear about impact cost.

When you place market orders, the order is triggered at the prevailing market rates. If the liquidity is low, chances are you will buy it at the worst possible bids. Hence you need to ensure you are transacting at high liquidity counters. I’d suggest you read this post on impact cost to know more (section 9.2) – http://zerodha.com/varsity/chapter/nifty-futures/

Karthik,
This is excellent stuff. people usually charge to give this kind of information. great job.
I am newbie in FnO . I felt there could have been some more examples of trades for PUT option and CALL Option .
I have two trades and lot of confusion.
1 – I bought , Tatamotors 30 MAR 480CE @9Rs Premium on 27FEB, when spot price was 455.
I know I should have sold the CALL option. Instead I bought it.
Now spot price increased to 463 on 3 March but premium fell to 6RS
I have tons of time in OTM call, but I see the MTM is calculated for this option .
meaning everyday Price difference is added or taken as M2M.
– This way I am incurring tons of losses.
if I make profit after 15day or 20days … everyday , M2M in Options trading is killing me.
I tried to reach your support center with no luck.
Exiting the position will cause more losses .
– IS there an M2M for OPTIONS trading. if yes, could you write post with example explaining this one.

2 – Second one, I have tatasteel 30 MAR 480CE bought in OTM when spot price was 460, premium 19
and currently it is ITM spot price is 500+ premium is 26+ or something. as on march 3-2017
– I do not see MTM is calculated based on daily upmoves.
* This is very confusing to what I am reading and what I am seeing in practical.

Hey Karthik,
1. Can you explain in detail on what exactly Span, Exposure Margin, Premium Receivables and total margin mean? and how it is calculated. Is
2. Is there a formula that we can use to calculate the margin required say using previous closing prices (especially for writing options)
3. Say I am writing a CE and also I am buy a CE at a different strike. Assume the total margin required is 95k (post margin benefit of say 10k). I have 1 lakh in my account. How do I execute this trade?

Sir,
I recently join zerodha . I went through this chapter , but have some confusion.
say, I bought INFRATEL company call 300 by paying premium 15 RS. after some days call 300 premium increased 20 RS .
At this stage can i book profit by earning 5 Rs./share before expiry date.

sir,
i recently joined zerodha and buy option call 530 of gail on 7 march 2017 .Now on 9 march 2017 there is ex-bonus date and i think share prices will down because 3 share becomes 4 shares as bonus in ratio 1:3 . Now what will happen? can i have to face huge loss due to this?

Dear Karthik,
In the 2nd case study Nifty Long Stradle,
Why did you choose to short ATM option? There is a high probability that I would place market orders at the time of exit, given this I want to ensure that the loss due to impact cost is minimized. ATM options have lesser impact cost, therefore it was a natural choice. …….Here what does the impact cost mean?
Regards

Earlier, you said options in India are of European type and hence one cannot exit their positions until expiry. But at places you’ve said people profiting from the increase in premiums. I don’t understand. Can I exit options just like future, anytime I like/wish?

Hi Karthik,
Just sharing my first Options trade.. Need your valuable guidance.
Well keeping the UP Elections in mind, I decide to trade a Short Strangle on Nifty.
But on the date of executing the trade I realized that the OTM premiums have already been depreciating a lot anticipating the Exit Polls. So I tweaked my strategy a little bit and went on to adopt Short Straddle as the Volatility has not depreciated that much( the effect of Volatility is greater for OTM options as per my knwledge). As per my understanding the Volatility will still drop in the course of time after results get decalred.
1 sell 8950 CE Nifty @ 119
1 sell 8950 PE Nifty @ 108
Now is the point where I messed up a little.
Nifty at the EOD was around 8934.
I know that as I have sold the 8950 CE I should retain the whole premium. But in the MTM p/L section for this option was showing some other value. And to square off the positon I had to buy it at some value. Same was with PE options..

I basically got very confused. Like my question is like if I am selling a Call option at 100 for rs.20. then only if i let the options expire under 100 then I will pocket the whole premium.. Otherwise if have to close my positon(square off ??) before expiry I have to buy it back..
Also we have to not let the Exchange square off our position as it leads to STT (taxes).

Well thanks to Zerodha things like Options, Call, Put , IV are not alien to me anymore.
Please let me know what I have wrote regardiing Squaring off and Expiry is correct or not.

Btw, after all this goof up I still managed to make a small profit :).

Well, I’m happy to know you garnered the courage to short a straddle (btw, its short straddle not short strangle). This is probably the right strategy for the given circumstance in the market.

When you short options and collect premiums, you are entitled for the whole premium only if you manage to hold till expiry. However, if you wish to close the trade before hand, then its not a problem. Assuming it has moved in the right direction, you will make a smaller portion of the premium and not the entire premium.

I have a feeling that the premium will drop by around 9:30 – 9:45 ish….(just after the event is over), I’m not tracking the options…but if you do, please do let us know how it went. Good luck.

This is really a great article, Karthik. I’m a newbie in stock trading (just got my account opened in zerodha) and I’m beginning to take interest in Optional trading, which most of the people advise to stay away from 🙂
I have some doubt about calculating P&L for Long option especially when your option is ITM and it’s underlying stock and the premium are both gaining traction. Let say I took Nifty CE for strick price 9100 at premium 90 on 9th Mar 17 and yesterday it’s spot price was 9153 and the premium was 107. I’m calculating my P&L as: (IntValue gain + Premium gain) * LotQty
IV gain => 9153-9100 =53
Premium gain =>107-90 =17
LotQty = 75
P&L = (53+17)*75 = 5250
Is it correct or I’m missing something and If possible could you please write the formula?

Based on the lessons, this is the formula to calculate CALL buyers P&L
P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
It seems that premium gain is not in the picture. Right? Could you please clarify the same?

This formula – P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid , is applicable if you hold the position to expiry. However, if you decide to sell it before expiry, then P&L is just the difference between the premiums multiplied by lot size.

Karthik,
First things first. Thank you very much for the Lessons . I was trading in cash only for last 4-5 years and seen good and mostly bad days.
soon I shifted to zerodha, I started learning Futures and option since last one and half month. the kind of knowledge i gained clearly visible in my trading style when 80% profit calls and 20% mostly triggered by the stop losses. I wished I found your courses 4 yrs ago ,i would have been a HNI by now. Neverthless In recent rally your lessons bought me great fortunes and profound confidence .
Thanks you once again ,
Manju

hi Karthik,
i love to read all the articles in varsity, this has changed my perspective about market and trading. thanks for giving knowledge.
as i am really inspired by you , i have some personal question if you wish to answer?
what is your educational back ground?, what inspire you to venture in to market ? how did you start?

Thanks for the kind words, Kaushik. You may not believe it, at Zerodha we genuinely love to share what we know and help others. Knowing other will benefit from without any cost associated to it keeps us motivated all the time. Its just that I’ve been lucky enough to deliver the content via this medium.

I’ve done my engineering from RVCE, Bangalore followed by a MSc in Risk and Asset Management from EDHEC, France.

Hi Kartik,
Could you elaborate on how to set the stop losses for options? You have explained in one of the modules to set the stop loss as a function of the volatility, same calculated on the basis of the days to expiry. But there you had indicated that this method can be done for futures and stocks.
I was wondering whether the stop loss for the option can be calculated like the way as mentioned below:

Say the SD is calculated at 3%. which would mean that the stoploss for the underlying would be at 3% lower than the Entry Price (for a Long call).
If the 3% translates to an absolute value of 50 points, then depending upon the moneyness of the strike , I calculate the probable loss in premium by multiplying 50 with the corresponding delta of the option.
The stop loss for the CE would then be set at the entry premium less the value calculated in the previous statement.

Regarding a statement in Case 1 : “since there is ample time to expiry, a small dip in the stock price will lead to a good increase in option premium” – could not understand the essence of this statement.
The trader had bought a slight OTM PE option which would mean that the Delta would be within -0.3 and -0.5. A small dip in stock price would have an appreciable effect on premium because of the delta. But why is increase in premium being linked with the fact that it has ample time to expiry? At that point, theta decay rate is low, so the effect of delta on the premium would be more prominent than that by theta. Or am I missing something ?

I wanted to ask on block deals. As an individual I was part of block deal in recent times. executed by my broker.
meaning he took the money and executed the Block deal. ( legal and we have all transaction documents) .To get the money back from
broker individual has to pay service tax to govt. STT is already paid when block deal is closed .
I am wondering if you know any process around this or similar process . of paying Service tax .
once service tax is paid , I will end up paying capital gain . i am asking if this is normal process or am I in some money laundering scenario.
manju

Hello kartik thanks for VI short straddle strategy point no 23.4…yesterday I made 5 k in it …can you please suggest more stocks which showing such changes in VI …I had search with TCS etc but dont find such as Infy ..So please suggest stocks which VI is high before result ..thanks

Pl refer trade of infosy Q2 result in options. The trade was executed on 8th Oct’15 and the result was on 12th Oct’15. The trade was taken 3 days in advance. On removing Saturday and Sunday, we can say trade was initiated 1 day in advance. My question is that Implied Volatality increases as coming near to event(result declaration). But in present scenerio it was taken one day in advance. So is it advisable to take trade on one day in advance or to take nearby even declaration day (when IV will still go higher) ?

karthik sir
This is request to you pls…… provide a link for snapshot posting with question simultaneously
As before.Because sometimes we can not explains problems only in words.
I will be great step
Thanks sir

Thank you very much sir… I learned lot of things regarding options trading. Now I want to learn options trading more deeply. Can you suggest me some books regarding options trading. Which is yours favourite or u readeed…

Hi, Karthik! Thanks for everything.
My returns have significantly gone up only with 5 modules, one could only imagine what stuff is waiting with the rest of the modules.

Let me take this opportunity to ask a small query. As expected, in fact, better than expected, the TCS results were bad. So, I hedged TCS JUL 2450 CE with TCS JUL 2400 PE. The spot went from 2446 to 2396, but along with call, my put options decreased by 3 percent. As the underlying decreased, I was expecting for the premium of PE to increase (Also volatility increased, negligible change in Theta, Rho being constant). But my expectations were just expectations. I would like to know what went wrong with my analysis.

sir can we manually exercise an option;i.e at 12:00 pm on the expiry day or the exchange will do it for us after 3:30.kindly clarify.also there seems to be a problem with the comments section.I am not able to post my doubts here.hoping for some luck this time round

sir,in the first example when the base delta is 0.5 shouldn’t the gamma value be 0 instead of 0.005 because the delta has not changed and gamma is the rate of change in delta wrt to the change in spot.

I tried to buy BANKNIFTY03AUG1725100CE 20000 at 0.05 around 3.05pm.
But the order was rejected with below status message:
“RMS:Rule: Check freeze quantity for FO including square off order,Current:20000, limit set:2501 for entity account-ZB9950 across exchange across segment across product ”

What does it mean ?

I even tried to buy only 40, again failed saying “RMS:Rule: Option Strike price based on Ltp percentage for entity account-ZB9950 across exchange across segment across product”

Became an active trader, effective mar’17,
And learning everything about day trading. These modules are quite helpfule for a beginner like me. Thanks for bringing insights on option trading in layman’s language.
Just one queyry , since option call buying & put selling are one (being bullish) and option call selling and put buying(Bearish) are also same directionally, what happens to premium in case of put selling?
Say , I sold a put for a premium of Rs.50 and if spot increases , premium will go down or up? Similar if I sell a call, premium will go in which direction if spot price goes up?

dea sir
in above module, there is daily average of 0.04% . how u calculate tthat . is it average of last one year daily return values ?

As we can see the daily returns are clearly distributed normally. I’ve calculated the average and standard deviation for this distribution (in case you are wondering how to calculate the same, please do refer to the previous chapter). Remember to calculate these values we need to calculate the log daily returns.
◦Daily Average / Mean = 0.04%

Upper Range = 16 day Average + 16 day SD
= 0.65% + 3.567%
= 4.215%, to get the upper range number –
= 8462 * (1+4.215%)
= 8818
above stating that 8462*(1+4.215%)
i think this is not plus sign it should multiply sign 8462*(1*4.215%)
same for lower range instead of minus sign it should be corrected for multiply sign
please clerify

Have seen options with high IV as much as touching 40 just before the results day, however at the time the results are announced, the numbers change rapidly, why is the reason for that. Is it wise to always initiate a short strangle or like just before results day.

then if the spot price moves to 297. The difference is (297- 290) 7, after reducing the paid premium value, 2rs is profit.

Question 1: The intrensic value increase upto 7 difference if delta value is 1 only, am I right? or at the time of excersice this method will be considered.
2: As this is near ATM option, premium will increase 0.5 (delta approximately) per underlying value. Hence the premium will be (297-285=12) 12*0.5= 6, the total premium value is 5 + 6 = 11. will i get profit of 6rs if i square off?

I read complete option chapters (Chapter 4) but the confusion here is the premium will increase in the rate of delta (0 to 1) when underlying moving in the expected direction or as calculated in this method (long buy option: intrensic = spot- strike, profit/ loss= intrensic – premium). As per this method until the underlying move above to breakeven/ breakdown point, no profit. In CEAT India case, though the spot price was not even gone below Rs.1220/-, the premium increased (might be of delta, volatility), the client was able to make profit.

Is this a difference between excersice and square off or I misunderstood the concept.

1) The calculation works upon expiry, not during the series
2) The option is OTM at the time of buying (Spot @ 285, Strike @ 290) and transitions to ITM (Spot @ 297, Strike @ 290). The premium really depends on other factors, such as volatility and time to expiry

In Ceat case, the profits rolled due to Volatility. Remember, the premium is a function of multiple factors and not just Delta.

1. What should be the stop loss for nifty index option trading?
2. Should it be based on the index S&R or should it be a fixed % like say 30% based on the traders preference?
3. Are there any standard stop loss that needs to be followed for trading nifty 50 index?

Dear Sir,
Thanks for such wonderful and simple introduction to options.

I am bit confused with the Margins wrt to options. I felt margins in Futures are straight forward. I am little bit confused when it comes to options.
Assume I write NIFTY 10200 CE SEP 2017 option 4 days before expiry when Spot is trading at say 9960.
Margin requirement is 46000/- . Now by chance due to some very good news nifty moves drastically to 10150 there by increasing the premium sharply( this is an hypothetical situation). How will this effect my margin money which is locked in trading account.
Will the broker deduct amount during the trading session or only after closer of market.
My main doubt is how and when my margin vanishes assuming a black swan event. Will it happen when session is still live or after opening of next session.

If you have written options then margins gets blocked. Now if the position starts to move against you, the margin requirement also increases. This increased margin will take from you during market hours.

Hi,
Went through your content and wanted to ask few questions. Although option trading is a beast in itself
1. If i am good at identifying swing move and technical analysis can i just keep it simple by only Buying CE and PE in stocks (i.e. not at all selling or as we call it writing CE and PE ever)
2. I know time and volatility could be my enemies in above case, so can i trade like this in the beginning of the expiry(i.e. first 15days)

any other thing you want to tell me to be mind full. Everyone tries to keep it simple but i doesn’t happen always
and do have any links for similar study material for intraday trading? I need help wrt this area

Hi Karthik,
How does the premium of a stock’s call option change when there is spin-off/demerger of that company. Suppose i buy a 1000 CE of XYZ (exp. 25 January18) when spot is currently trading at 980 for let’s say Rs. 15. Now, XYZ announces that it’s doing a spin-off of its ABC subsidiary and each shareholder of XYZ gets 0.2 shares of ABC upon demerger. The demerger happens on 15 December. Now, on the expiry date (25 jan18), XYZ is trading at 800 and ABC is trading at 300. Since, i bought the call option before the demerger, my option’s intrinsic value should be 100 [ spot(XYZ+ABC) – 1000 CE] and my premium should shoot up in value? Am i correct? Is this how it will pan out or am i missing something?

Thanks Karthik. Where can i find such information? Will the exchange provide information after the demerger? Do you know of any previous instances where this happened and what happened to the premiums?

Long Call and short Call or Long Put or Short Put will nullify the trade if done on the same strike. If you do it across different strikes, then that would be a spread. Have explained spreads in the next module 🙂

Hey Karthik!
I enjoyed all your modules and I have been trading for the last 1 year. My question is about the “bids and offers in premiums”. Why is that I can’t sell at the price I want to. Why is the actual price I sell is different from the market price. My friends who trade through HDFC securities told me that they have never faced this issue. Please do enlighten me. Thank you.

Well, I suspect you are placing a market order while placing orders and your friend are probably placing a limit order. When you place a limit order, you will transact at the price you want. When you place a market order, you will get the price prevailing in the market. I’d suggest you always place a limit order.

Thanks for the reply. Well When I place a limit order and the premium price doesn’t touch that price. For example I have placed the trigger price at 38 and the CMP is around 36 and the price directly jumps to 40, the order doesn’t get placed at all.

Yes, this is quite possible. These are small intraday gaps, where trading does not happen at a particular price, rather jumps that price point to trade higher or lower. This happens especially when there is high volatility. So always track your order for execution, even though its a limit order.

Hi Karthik
Kindly solve my dilemma..
As on 25th Jan 2018 NIFTY Closed @11069 by losing 16 Points on day.When i noticed Option Chain on NIFTY For March 2018
For The 12100CE MARCH 2018 , Premium was Prev CLOSE=16.35 OPEN=19.20 HIGH=23.05 CLOSE=15
But for 12000CE MARCH 2018 ,The premium were Prev CLOSE=24.55 OPEN=25 HIGH=25.70 CLOSE=22. Could you pls clarify why 12100 Call jumped from 19.20 To 23.05 where as 12000 Call Jumped Only from 25 To 25.7 ?

Hi,
If we buy a very Deep CE OTM of far Month NIFTY series(idea here is to minimise DELTA&THETA) , and on a day say VIX is 3% , So Change_In_Option_Premium= OPTION VEGA * VIX , So is it possible that we pocket the Higher Premiums than paid?

Hi, I have not read the whole module yet but i have some general doubts please reply.
Spot Nifty : 10700
1. If i sell Nifty CE of 10850 and premium is 26 rs. and on expiry spot nifty is 10855 then will i be making a profit or loss ? and how will it be calculated?
2. If i buy Nifty CE 10800 premium 42 rs. and on expiry Nifty spot is 10780 and premium is 50 rs. so can i square off my trade and take 50-42 8rs profit ?
3. If i buy Nifty CE 10800 premium 42 rs. and on expiry spot nifty is 10780. then i will have to take 42 loss ??
4. This might sound dumb but do you have to square off your options trades before/ on expiry ??

1) You will lose Rs.5 from the premium received, because 10850 is the strike and the spot expired at 10855, hence intrinsic value is Rs.5. So net profit of Rs.21 minus applicable charges
2) Yes, you can
3) Yes, you will lose the entire premium
4) I’d prefer to square of my trades, but technically you can leave it open and let it expire.

If i let me options expire it means that i am exercising my options correct ?
So In the first example where i sell Nifty CE 10850 what do I have to do on expiry to get the profit ? Let the trade expire without squaring off or square off by buying Nifty CE 10850 (at this point to square off i will have to buy it and the premium will be more then 26 because the option is at the money now, so by squaring off wont be be making a loss ? )

Also, in the third example i am losing 42 rs cuz Nifty is expiring below my strike price… so do i need to square off or no?

My broker told me that you will be charged a penalty if you dont square off all your trades on expiry?? I googled it and and there are some STT charges that are debited from the account, so the question is… which trades to sqaure off and which trades to not?

Yes, but the option will be exercised only if it has an intrinsic value. Else it will be considered worthless. I’d suggest you square off the position. I’m talking about squaring off the position just before the market close – like 3:20 PM.

It does not matter – the option is worthless and even if you square off, you will still make a loss of Rs.42.

Your broker needs to educate himself, maybe you should ask him to read up on Varsity 🙂

Okay so, Nifty spot 10700
I Buy Nifty CE 10750 Premium 40 Rs
On expiry Spot is 10800 so do i still need to square off the trade at 3:20? cuz the premium will be less than 40 (cuz of time decay?) lets say 15 rs
so if i buy at 40rs and sell at 15 rs wont that mean that i am making a loss despite my option being in the money?
and if i exercise it then i will get 50-40 = 10 rs profit

I have a general query, I purchased Auropharma CE 460 feb expiry on 29th Jan. I’m a bit puzzled because I keep getting a statement for my trade every day since the purchase date. Is this how it generally works?

Hi Karthik,
Continuing my above query. I purchased Auro Pharma on 29th Jan at CE 30.25, lot 800 @ strike price 640. The premium was around 24200. On 2nd feb i received the margin statement where underlying price was 604 and the net option value is mentioned as -27640.
I’m not sure what to make of this. Will i be incurring an additional loss since the underlying is below the strike price? But i understand that the max loss in a call is the premium paid.

Hi Emmanuel,
A Margin statement essentially contains details of funds available in the various segments for your account. It doesn’t have details of your positions or trades undertaken. I’m not too sure which report you’re actually referring to. Suggest you send the report to [email protected] to seek clarification

Hey Karthik,
Can you help me about RMS rejection rule policy especially for Zerodha account holders and it’s circuit limit (already read nse RMS rule policy). I’m having this issue from last week to cont. current trade sessions.I’m not able to figure out because I got same rejection notification when I place order within the limits.
‘

RMS rule: Option strike price based on Ltp % for entity A/C-X across exchange across segment product. what is the mean of this in reference of nifty ?
for instance If the banknifty price is 26000 around then there is any boundations for which only I can place the orders ?
Can you please explain this like other term in varsity ?

Is volatility always usually high before results and important announcements?
Shoulnt it be the other way round??
after the news market tend to big a big move in one direction… so the movement in one direction in more, hence more deviation from mean, hence more volatility. So how is market volatile before and not after results and announcments
So general volatility based strategy is shorting both call and put ATM options and squaring off just before the announcement?

1.) Why volatality is high before any event ? even though price is not changing much, time is same, delta is same.
2.) Why just after announcement volatility decreases very fast, even sometimes price difference is not much ?